Thursday, November 10, 2011

Where No Birds Sing

Governor Defers Budget Decisions,

Blames Volatility in World Markets

A widely used political metaphor is the canary in the mineshaft. The small yellow bird is said to be more sensitive to carbon monoxide and methane than human beings. Therefore, when poisonous gases accumulate in an enclosed underground area, the canary is reputedly the first creature to sense its toxic effects. This makes the bird a living smoke alarm, and signals miners and others to escape.

The canary warns of danger not by calls of alarm, but by their absence. Since canaries sing a great deal of the time, miners could read their silence as indicating that the birds were dead or dying, and that it was past time to flee. The concept of the canary in the mineshaft is used to describe a situation in which peril is perceived by a few, but is imminent for all.

The canary rule can be applied to financial situations, weather conditions, rising waters or other impending crises, physical or economic. The canary in the mineshaft provides an early warning of danger ahead. Theoretically, this avian warning information gives the authorities, or whoever has brought the canaries to the mine, the opportunity to take remedial action in an attempt to forestall the disaster that lies in wait if nothing is done.

Advance information is also a valuable asset in the business world. People have gone to jail for using it for their own benefit at the expense of others. The rules on this sometimes can be difficult to follow, although there are obvious cases where people (e.g. messengers or printers) have obtained information on the job about future transactions and used that knowledge for personal gain.

People who trade stocks and bonds make decisions based on their beliefs of what the market will do. Investment decisions should be made on the basis of the informed judgment of market professionals. It is logical that such judgments should be made, in part, on the basis of what other investors are doing. It is illegal, however, to be too well informed, and people can be prosecuted if they are caught at insider trading.

An opposite flaw in the dissemination of information is criticized in today's Post by E.J. McMahon. He observes that an important budget document is now more than ten days overdue. Every October 31 in New York State, the governor's Division of the Budget is supposed to issue a mid-year financial report, detailing the degree to which the state's real-world economic situation conforms to the projections laid out in the annual budget adopted by the legislature at the end of March.

In addition to tracking the state's actual tax revenues, which according to the comptroller's office are down by almost $400 million from the forecast numbers, the mid-year accounting is an important indicator of the "fiscal trends that will shape the next Executive Budget". It also provides a context to evaluate the budget requests made by each of the state agency heads, which were due this week.

Governor Cuomo explains his decision to delay the DOB's mid-year report, and, consequently, to postpone indefinitely the deadline for agency heads to submit their budget requests, as follows: "Between Greece and Europe and the stock market going up and down, there has been significant ... volatility. We want to make sure we have the best possible [projections], because we are going to start making real decisions based on this information."

The phrase "making real decisions" in government usually means firing people or shelving capital projects. Since the state has won major concessions from the unions in exchange for a no-layoff pledge, it will be more difficult to find areas in which expenditures can be substantially reduced.

Since it is unlikely that there will be a tide-turning economic recovery in the state in the next few months, the delay in submitting reports and budget requests will most likely mean that the reductions, when they come, will be sharper. This is a perennial situation; it recurs with monotonous and unsurprising regularity each budget cycle. The administration buys breathing room, but at a cost.

The next four and a half months will complete Fiscal Year 2011-2012. As the due date for the next budget approaches, the struggle to balance the budget, or to find a ruse to avoid a balanced budget, will intensify. Mandatory cost increases and a projected $2.4 billion budget gap will create an even more difficult situation for next year.

Some alleviation of the bad news may come from the fact that if the budget is so dire than reasonable people will not fault the governor for being unable to keep his commitments. However, Cuomo appears to be proud of his promises, and as a strong governor and potential national candidate, he is under closer scrutiny than some of his rivals.

We fear the silence of the canary. Muzzling or ignoring the bird may provide time to work on the problem, but it will not add any oxygen to the mineshaft.

StarQuest #784 11.10.2011 824 words

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